THE RED HOT DIGITAL TAX DISPUTE
February 22, 2020 - Douglas Myser
The red hot digital tax dispute. In the Ron Howard film, A Beautiful Mind, Russell Crowe plays troubled math genius John Nash. In one famous scene, Nash and his male friends are in a bar when in walks a group of women. Nash realizes that if all members of his crew compete for the most attractive women, it's likely none will succeed in their quest for female companionship. On the other hand, if they cooperate and spread their charms more evenly among the ladies, success is more likely. Cooperation beats competition. At ladies night, men in effect subsidize women through the platform provided by the establishment. Note that the female clientele is the key to increasing profit, but the ladies make no payments. ON the business books, the profits attributable to female participants are "hidden" because all that is seen are the losses form the cost of free drinks. The red hot digital tax dispute.
Now when you apply that to large multinationals like Google, Facebook and Amazon, users are provided a service for which they are charged nothing. That's because their presence increases the ability of the service provider to sell other services to other customers. For example, an online search engine may sell advertising targeted at French users of the digital service to a German auto manufacturer. If we don't take into account that the service provider is a two sided business, all we can see form a financial point of view is that revenue is generated by sales to Germany. After the huge upfront costs of developing the search engine, the cost of providing services to French users is close to zero. And the French users pay nothing for the service. ON the financial accounts, French users are invisible. But the reality is that French users are integral and unique to the service provider generating profit from advertising in France. Just as governments impose royalties for extraction of natural resources inside their borders, it's fitting for France to impose tax on profit from advertising paid for by a German manufacturer. Like profits from mining, profits form a search engine inside of France, should be taxable to the French government.
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